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FTC’s
Controversial Plan To Change The Patent System:
How
Antitrust Laws Affect Patents: Important Points For Patent Firms To Consider
Jessica Akers; Dennis
Fernandez
Fernandez &
Associates, LLP.
Menlo Park, CA 94025
Abstract
Patent
rights promote innovation and expression of new ideas and inventions for the
public benefit. Patent rights give
incentives to inventors to express their ideas by giving them assurance that
these ideas will be protected so that others will not be able to profit from
them. However, while patent protection provides economic incentives for
inventors, this protection is not unlimited.
Antitrust laws impose important restrictions to ensure that inventors
are not overstepping their boundaries by restricting competition.
I.
Introduction
Antitrust laws
aim for the goal of finding a perfect competitive economy. A perfect competitive economy occurs where a
large number of firms produce the same product, and no single firm is able to
control the market for that product by reducing its output. For example, if one
firm reduced its output, perfect competition would exist if that firm’s
competitors would be able to increase their output by the same amount.
Some ways
antitrust laws are able to promote competition are by strictly monitoring
firms’ actions by regulating potential mergers and preventing firms from
forming monopolies. A monopoly occurs where the monopolist firm has the power
to reduce total market output by reducing its own output. A monopolist is able to do this because
there are no other competitors in the same market to respond to the
monopolist’s output decrease with an offsetting output increase. As a result, the market price goes up when
the monopolist’s price goes down [1].
II.
Important Antitrust Statutes That Regulate Patent Firms’ Actions
|
§1
Sherman Act: 15 U.S.C. § 1 “Agreements In
Restraints Of Trade” |
Every contract,
combination in the form of trust or otherwise, or conspiracy, in restraint of
trade or commerce among the several States, or with foreign nations, is
declared to be illegal. Every person who shall make any contract or engage in
any combination or conspiracy hereby declared to be illegal shall be deemed
guilty of a felony. |
|
§2
Sherman Act: 15 U.S.C. § 2 “Monopolization” |
Every person who shall
monopolize, or attempt to monopolize, or combine or conspire with any other
person or persons, to monopolize any part of the trade or commerce among the
several States, or with foreign nations, shall be deemed guilty of a felony. |
|
§3
Clayton Act: 15 U.S.C. § 14 “Agreements Not
To Use Goods Of Competitor” |
It is unlawful to prohibit
the making of a lease, sale, or contract for sale of goods or other
commodities, whether patented or unpatented, on the condition . . . that the
lessee or purchaser shall not use or deal in the goods . . . of a competitor
. . . where the effect . . . may be
to substantially lessen competition or to create a monopoly in any line of
commerce. |
Federal
Trade Commission’s Proposals
Recently, the
Federal Trade Commission (FTC) recommended proposals to change patent policy.
The reason for the proposals was to improve patent quality and to lower
restrictions on competition. In the
recent FTC report, the first two chapters discuss the relationship between
competition and intellectual property.
It first discusses the harms on competition when a patent is either
poorly written or contains claims that are too broad. This can lead to problems that raise the cost of innovation such
as firms foregoing their R & D efforts for fear of infringing an improperly
written claim.
III. How Antitrust Laws
Affect Intellectual Property
3.1 Horizontal Restraints
Traditionally,
§ 1 Sherman Act offenses have been thought of as being either horizontal (among
competitors) or vertical (e.g. between seller and buyer, or between licensor
and licensee). Horizontal antitrust
concerns arise where firms that would otherwise be competitors combine their
efforts to develop technology.
Antitrust law looks at whether such arrangements would further
competition in the relevant market or reflect a combination that would restrict
output, increase price, or reduce incentives for innovation. Some patent
activities that § 1 Sherman Act regulates are patent pooling and joint research
ventures [2].
Patent Pooling
Patent
Pooling occurs when patent rights are exchanged between two or more
parties. In determining whether the
patent pooling behavior is anticompetitive, courts apply a rule of reason
analysis which analyzes the relevant market of the pooled technologies, the
intent of the parties, whether the patent pool is open or closed, and other
relevant factors, such as how their actions will affect other markets or if
their actions would discourage future competition.
The
relevant market includes all technologies that compete with the pooled
technologies. Once that market is
defined, one looks to the market shares of the pooled technologies and those
outside the pool. If the owners of the
pooled technologies collectively dominate a market that was previously
competitive, the pool may confer on them the power to fix and maintain
royalties or prices in the downstream market to an extent that the owners did
not previously enjoy [3]. In addition
to the relevant market inquiry, factors of intent are relevant to the inquiry
also. If the intent is to obtain
monopoly power or to exclude competitors from the market to a degree beyond
that conferred by the patent to the individual patentee, the combination is
illegal [4].
Joint Research Ventures
Joint
research ventures occur when competitors or potential competitors exchange
scientific research. The Antitrust
Division of the Department of Justice outlines a general enforcement approach
to research ventures among manufacturers with significant market shares in
their output market that is very similar to the analysis of patent pools. The Department analyzes the market to which
the relevant R & D belong; if there are four or more R & D efforts, the
Department would not likely find anticompetitive effect. The Department also looks at whether any
types of efficiencies would be created by a particular joint venture. Because of the concern of insufficient
research expenditures, Congress enacted the National Cooperative Research Act
(NCRA) in 1984, which analyzes joint research developments under a rule of
reason analysis by taking into account all relevant factors affecting
competition. The NCRA requires that
companies register their joint procedures with the Attorney General and Federal
Trade Commission [5].
3.2 Vertical
Restraints
While
antitrust agencies are concerned with horizontal restraints on competition,
they are also concerned with vertical restraints. Examples of vertical activities that are scrutinized heavily are
tying arrangements and exclusive dealing agreements.
Tying
Arrangements
A tying
arrangement is a sale or lease of a product on the condition that the buyer or
lessee takes a second product as well. Tying arrangements can be illegal either as contracts in
restraints of trade under § 1 of the Sherman Act, or else under § 3 of the
Clayton Act.
One theory as to
why courts oppose tying arrangements is because this creates a restriction on
consumers on what they should purchase.
A buyer would be forced to buy a product that they would not rather buy
[6].
In the patent
context, a patentee-licensor’s efforts to condition the granting of a license
upon the acquisition of some separate article of commerce from the licensor may
amount to patent misuse, an improper tying arrangement in violation of
antitrust laws, or both.
Exclusive
Dealing
An exclusive
dealing arrangement is an agreement between buyer and seller under which the
buyer agrees to purchase all its needs of a particular product from the seller,
i.e. the buyer agrees not to deal in the same product with a different
supplier. Exclusive dealing
arrangements can be held as illegal under § 3 of the Clayton Act. The legality of such arrangements depends on
the degree and extent of foreclosure to others in the market seeking to deal
with the party precluded by the agreements [7].
IV.
Single Firm Activities
§ 2 Sherman Act
is mainly directed at actions within a single firm. § 2 Sherman Act looks at firms who monopolized a specific market
or their attempts at monopolization.
Monopolization occurs when a firm has monopoly power in a defined market
and willfully acquired or willfully maintained that power. Attempted monopolization occurs when a firm
has an attempt to monopolize a defined market, in attempting to monopolize a
firm engages in predatory conduct to pursue that goal, and there is a dangerous
probability of success [8].
V.
Federal Trade Commission’s Proposals To Change The Patent System
Antitrust
agencies, such as the FTC, have become more concerned with patent firms’
activities. Recently, the FTC proposed
regulations to create tighter restrictions on patent protection. The FTC’s goal is to reduce the number of
questionable patents that restrict competition. Another concern is to provide better quality patents so that
patentees do not have more protection than what they are entitled to. To do this, the FTC has recently proposed
certain guidelines that raise the bar for those seeking patent protection.
5.1
In Obvious Determinations, Shifting The Burden From The Challenger To The
Patentee
Current patent
rules require the patentee to show that claimed features of the patent are
coextensive with those of the successful invention. Once this requirement is
met, it is presumed that the invention itself, rather than other factors,
caused the commercial success. The
burden then shifts to the challenger to present evidence that rebuts this
presumption [9]. The FTC however recommends
that the patentee bear the ultimate burden of demonstrating that the claimed
invention caused the commercial success.
It reasons that the burden shifts too easily to the challenger and since
it is the patent holder that would best know the cause of its product’s
commercial success, that the patent holder should be the one required to
demonstrate it.
5.2
Lower Standard For Determining Obviousness
In determining
obviousness of a patent, some recent cases have required the PTO to point to
particular items of prior art that concretely suggest how to combine all the
features of the claimed invention [10].
The FTC criticizes this requirement by stating that requiring concrete
suggestions beyond those actually needed by a person in the art and failing to
give weight to suggestions implicit from the art as a whole and from the nature
of the problem to be solved is likely to result in patents on obvious
inventions which would be detrimental to competition.
5.3
Reducing The Standard For Challenging A Patent’s Validity From Clear And
Convincing To Preponderance Of The Evidence
Under current
patent rules, if the examiner does not produce a prima facie case of
obviousness, the applicant is under no obligation to submit evidence of
non-obviousness. Additionally, office
personnel must treat as true a statement of fact made by an applicant in
relation to the asserted usefulness of the invention unless countervailing
evidence can be provided that shows that one of ordinary skill in the art would
have a legitimate basis to doubt the credibility of such a statement [11]. Furthermore, the PTO is significantly under
funded, leaving patent examiners with little time to research and evaluate
patent applications. According to the
FTC, these factors combined with the fact that the PTO grants patents based on
a preponderance of the evidence standard, create an inappropriate presumption
of a patent’s validity. Because of
these factors, the FTC believes that this presumption should not be aimed
toward a patent’s validity, but instead should point to a patent’s
invalidity. To accomplish this, the FTC
seeks to enact legislation, which lowers a challenger’s burden from clear and
convincing to preponderance of the evidence.
5.4
Require Publication Of All Patent Applications 18 Months After Filing
Unless a patent
application is filed exclusively in the United States, most patent applications
have to be published within 18 months after filing. Because patent applicants who publish their applications can
prevent copying by obtaining royalty rights after the patent issues, the FTC
feels that patent applicants endure no harm from publishing their
application. Therefore, the FTC
believes that this 18 month publication requirement should extend to patent
applications that are only filed domestically as well.
5.5
Create Intervening Or Prior Use Rights To Protect Parties From Allegations That
Rely On Certain Patent Claims First Introduced In A Continuing Or Other Similar
Application
Even after a
patent application becomes published, the applicant may continue to amend its
claims. The major problem with applicants
amending their claims and filing continuation applications is that sometimes
applicants use these procedures as a way to broaden their claims to cover a
competitor’s product. There have been
many efforts to remedy actions for bad-faith broadening of claims. However, there are legitimate reasons for
amending claims and filing continuing applications. To protect good-faith inventors who infringe a patent only
because of claim amendments in a continuation application, the FTC proposes
that these applicants should be able to obtain intervening or prior use rights.
5.6
Raise The Requirement For Willful Infringement: Requiring Either A Written
Notice Of Infringement From The Patentee, Or Deliberate Copying Of The
Patentee’s Invention, Knowing It To Be Patented
Many times
inventors deliberately fail to read a competitor’s patent for fear of treble
damage liability. However this failure
may harm non-infringing efforts aimed at business or research strategies,
causing wasteful business resources, resulting in duplication of effort, or
preventing innovation that could have been derived from disclosures, thereby
restricting competition. At the same time, the FTC agrees that infringers
should not be allowed to profit from others by knowingly and deliberately using
another’s patented invention.
Therefore, the FTC seeks to create a balanced medium where potential
patentees can read other patents for their disclosure value, while at the same
time, assessing potential infringement that may arise.
VI.
Points To Consider For Complying With The FTC’s Proposals
6.1
Submit Cease And Desist Letter
If a patentee has
already secured a patent and seeks to collect treble damages for willful
infringement, the patentee should submit a cease and desist letter to the
potential infringer, clearly stating how the infringer infringes the patentee’s
patent. That way, if the FTC’s proposal
to raise the standard for willful infringement is enacted, the patentee will
still be able to collect treble damages by showing that the infringer had
notice that it was infringing another’s patent.
6.2
Optimize Patent Values
For those seeking
patent protection of a product, with the hopes of making that product
commercially available, firms should look at ways to increase the patent’s
productivity and value, while being very careful not to infringe on another’s
patent. If the FTC’s proposal for raising the willfulness infringement
requirement becomes enforced, then firms will have greater flexibility in
reading other patents for non-infringing uses, such as uses for business
strategies and in research and development.
6.3
Avoid Overly Broad Claims
In deciding
whether to patent, firms should consider the scope of the claims. Does the patent application have claims that
cover more than what is necessary to protect the invention? Overly broad claims can cause
anticompetitive effects because other competitors may forgo research and
development efforts fearing that they will be infringing an improperly covered
patent.
6.4
Funding Business Ventures
For investors
deciding whether to fund companies collaborating together, beware of possible
antitrust violations. For example, if
the particular patent field is relatively new and both companies are the only
ones producing in this field, then a § 1 Sherman Act violation may arise where
these companies are trying to exclude competitors. In deciding whether to fund a single firm’s patent procurement,
investors should look to see if that firm has or will have a dominant market
share for that particular product. If
so, this creates a potential § 2 Sherman Act violation of monopolization or
attempted monopolization. Investors
should look to see what the relevant market is for that particular product, and
how much of a need there is for that market.
6.5
Voluntary (Not Mandatory) Package Licensing Arrangements
Often times,
packaging patents in one license may constitute patent misuse or even an
antitrust violation. While voluntary
package licenses have been held to be legal, mandatory (otherwise known as
compulsory) package licenses have been held as illegal [12]. Unless the licensing package contains
blocking patents (where each patent is dependent on another), firms should
avoid using mandatory licensing provisions.
6.6
No Tie-Ins With Intellectual Property
A tying
arrangement can occur where a patentee-licensor conditions the granting of a
license on the licensee’s agreement to use the licensor’s trademark when
selling products that are manufactured through use of a patent [13]. The main reason why these arrangements are
disfavored is because this arrangement often times results in the
post-expiration of patent royalties.
6.7
Prohibited Royalty Restrictions
A patentee is generally freely able to negotiate a royalty that a prospective licensee is willing to pay. However, there are some royalty arrangements, which courts have determined to be inherently unreasonable, or an improper attempt to extend the scope or terms of a patent monopoly. One such example is when a patent owner commits patent misuse. Patent misuse may occur when a patent owner conditions the grant of a license on a licensee’s agreement to pay royalties based on total sales regardless of the actual use of the patented product or process [14]. However, the parties may voluntarily and for convenience agree to this type of royalty structure [15]. In determining whether the licensee entered into the agreement voluntarily, courts look to coercion on the part of the licensor [16].
Courts have been
much harsher with respect to efforts by the patentee-licensor to discriminate
between licensees on the basis of royalties.
One example is when there is discrimination in royalty rates based on
the licensee’s geographic location [17].
Unless there is a “rational basis” for a particular discriminatory
structure, such as different end users by different licensees, or increased
production costs, patentees-licensors should avoid these types of royalties
[18].
Patentees may
also want to consider making their technology easier to license, for both
academic research and commercial purposes, which is what Microsoft has recently
decided to do. Microsoft has even
designed a royalty-free program, in which the academic community may access its
portfolio of copyrighted and patented technology for noncommercial use and
research. In the commercial context,
Microsoft recently announced two licensing technologies available: one for file
transfers and one that makes reading text on computer screens clearer. General counsel Brad Smith even agrees that
“this kind of step is consistent with the kinds of steps that others in the
industry” have been encouraging them to take [19].
VI.
Conclusion
Patent rights
promote expression of ideas for the public benefit. By granting patent
protection, this provides incentives for inventors to disclose their
inventions. To ensure that these
inventions are available for the public benefit, antitrust laws monitor the
patent system, to make sure that others are not hindered from exposing their ideas. Patentees should be very careful when
drafting their licensing agreements and royalty arrangements. Furthermore, should the FTC’s proposals
become enforced, patentees need make sure they are not overstepping their
boundaries when structuring their claims too broadly and also need to be prepared
to prove that their patent is non-obvious even without a showing of obviousness
by the patent examiner.
[1] I PHILLIP E. AREEDA & HERBERT HOVENKAMP, ANTRISTRUST LAW: AN
ANALYSIS OF ANTITRUST PRINCIPLES AND THEIR APPLICATION ¶ 100A AT 4 (2000).
[2] 15 U.S.C. § 1.
[3] See Standard Oil Co. v. United States, 283 U.S. 163, 174
(1931).
[4] Carpet Seaming Tape Licensing Corp. v. Best Seam Inc., 616
F. 2d 1133, 1142 (9th Circuit 1980).
[5] Department of Justice, Antitrust Enforcement Guidelines for
International Operations, 1988 Trade Regulation Reports, at 41-53, 141-56 (CCH,
No. 24, November 10, 1988).
[6] 15 U.S.C. § 14.
[7] 15 U.S.C. § 14.
[8] Syufy Enterprises v. American Multicinema, Inc., 793 F. 2d
990 (9th Circuit 1986).
[9] ROBERT L. HARMON, PATENTS AND THE FEDERAL CIRCUIT § 1.4 (B) at
169-170 (5th ed. 2001).
[10] See MERGES & DUFFY, PATENT LAW AND POLICY; CASES AND MATERIALS
7/10 at 132-133.
[11] United States Patent and Trademark Office, Utility Examination
Guidelines, 66 Fed. Reg. 1092, 1098-99, (2001).
[12] United States v. Paramount Pictures, Inc., 334 U.S. 131
(1948).
[13] Switzer Bros., Inc. v. Locklin, 297 F. 2d 39 (7th Cir.
1961).
[14] Zenith Radio Corp. v. Hazeltine Research, Inc., 395 U.S.
100 (1969).
[15] Automatic Radio Manufacturing Co. v. Hazeltine Research,
Inc., 339 U.S. 827 (1950).
[16] Hull v. Brunswick Corp., 704 F. 2d 1195 (10th Cir. 1983).
[17] Laitram Corp. v. King Crab, Inc., 244 F. Supp. 9, modified,
245 F. Supp. 1019 (D. Alaska 1965).
[18] Bela Seating Co. v. Polaron Products, Inc., 438 F. 2d 733
(7th Cir.), cert. Denied, 403 U.S. 922 (1971).
[19] “Microsoft to broaden patent licensing”,
http://www.siliconvalley.com.